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RESPONSIBILITY ACCOUNTING

Responsibility Accounting refers to an accounting system that collects,


summarizes, and reports accounting data according to the responsibility of individual
managers. It is an accounting system that seeks to provide information to evaluate each
manager on the revenue and expense items over which he or she has primary control.
Clear lines of authority and responsibility must exist throughout the organization.
The various managers of the company, their responsibility level, and the lines of
authority existing within an entity should be as clearly defined.
Objectives of Responsibility Accounting:
Control costs, revenue and financial resources
Facilitate the evaluation of divisional or departmental performances
Determine the contribution to income of each responsibility center
Motivate supervisors to attain their objectives
Assure management of goal congruence in the organization
Responsibility accounting enables management to pinpoint areas of weaknesses in the
organization and determine whether the costs and expenses incurred in each sub-unit
are proportionate to its contribution to companys income.
Responsibility center is an organizational unit headed by a responsible manager. It
is a segment of an organization which delimits the revenues and expenses charged to a
particular executive.
Cost or expense center is a responsibility center, wherein costs incurred are
measured without measuring the monetary value of its output. It is a segment of an
enterprise having only expense items. (Ex. Accounting department and the
maintenance department).
Profit center is a responsibility center the performance of which is measured in terms
of both revenue realized and costs and expenses incurred.
Investment center is one wherein the manager is held responsible not only for
revenue, cost and expenses but also for the use of its resources. It is a segment of an
enterprise having revenues, expenses, and an appropriate investment base.

The control cycle planning
The control cycle is comprehensive in that it includes planning, measurement,
and evaluation. The planning process is accomplished through budgeting; the
measurement process is the mechanism for feedback; and evaluation is the means
for determining what actions to take.
Budgeting the coordination of financial and nonfinancial planning in an attempt to
satisfy the goals and objectives of the enterprise.
Controllable and Non-controllable Costs
Responsibility accounting requires the classification of costs into controllable and
non-controllable. The controllability of a cost item depends on ones scope of authority
and the consequent influence he has over the cost item.
An item of cost is controllable if the amount thereof is significantly influenced by
the action of the manager of the responsibility center. Significant rather than complete
influence is required because rarely does an individual have complete control over all
factors that influence any item of cost.
Examples of controllable cost are the direct materials and direct labor costs in a
department because the supervisor therein exercises significant influence in the control
of quantity of materials consumed and number of labor hours used in the production
inasmuch as he can adopt measures to minimize material wastages and idle labor time.
An item of cost is non-controllable (or uncontrollable) if the manager does not
have significant influence over its behavior. Allocated costs are non-controllable
because the amount allocated to a responsibility center depends on the formula or base
used in their allocation.
Some items of cost, although classified as direct cost of a center, may be non-
controllable. Examples are depreciation of the fixed assets in the center and the
salaries of the centers manager.
Direct and Indirect Costs
Direct costs are those that are directly traceable to specific focal points.
Examples: Direct product cost direct materials and direct labor
Direct departmental costs salaries and wages in a particular department
Indirect cost are those that are not traceable directly to specific focal points. Their
assignment to specific focal points requires allocation.
Examples: Indirect product cost indirect materials, indirect labor and depreciation of
factory building
Indirect departmental costs depreciation of a building being occupied by
different departments and cost of power when there is only one power meter in the
compound.

Transfer prices
When a division or segment does not sell its output to outside parties but only to
other segments, it is necessary to establish a transfer price which must be paid by the
other division so that the producing division can have measured revenue.
-this enables the producing unit to become an earnings center rather than an expense
center.
Sub-optimization
Whenever segmental earnings are used as a performance measure, the effect on total
company net earnings of attempting to maximize individual segmental profits must be
measured.
Emphasizing segmental earnings may lead to competition among units to the detriment
of total company earnings. This is called Sub-optimization.
Responsibility Report how they relate to each other
Reports in a responsibility accounting system are filtered and condensed so that
the areas reported are those that need attention.
The segment manager is responsible for any unfavorable variance. The
managers immediate supervisor will receive a summary of the managers
performance.
Timeliness of reports
Reports should be prepared as soon as possible after the end of the
performance measurement period.
Reports should be issued regularly.
Regularity is important so that the managers will rely on the reports and
become familiar with their contents.